Call Money Rate

The call money rate is the interest rate charged on call money: very short-term loans between banks and other approved institutions, usually for one night and usually without collateral. The name comes from the fact that such funds can be "called", or demanded back, at very short notice. It is one of the most basic prices in a financial system, showing what it costs a bank to cover a cash shortfall until the next business day.

The call market is part of the wider money markets, alongside secured lending through a repurchase agreement (repo), short-term government bills and commercial paper. The US equivalent is the federal funds rate; in India the weighted average call rate is the Reserve Bank of India's formal operating target. The term should not be confused with call deposits, which are customer deposits repayable on demand.

Imagine a row of shops that must each have enough change in the till at closing time. One shop has too little, its neighbour has spare cash, so the neighbour lends some overnight and gets it back in the morning with a small fee. That fee, worked out as an annual percentage, is the call money rate.

Banks face this every day. Customers move money in and out, payments clear, and some banks end the day short of the reserves they need while others hold more than they want. Lending the surplus overnight earns a little interest; borrowing it avoids a costly trip to the central bank. When cash is scarce across the system, the fee rises; when it is plentiful, the fee falls.

Each call loan is agreed between the two banks, by phone, broker or electronic platform, so there is no single official rate. Central banks and statistics providers publish a daily average, often weighted by volume, along with the high and low of the day. Several forces push it around:

• System liquidity. Government payments, tax deadlines and cash withdrawals before holidays drain reserves from banks and push the rate up; government spending and maturing securities add reserves and push it down.
• Reserve requirements. Banks that must hold a minimum average balance at the central bank borrow harder near the end of the maintenance period.
• Credit standing. Because call loans are usually unsecured, weaker banks may pay more or be shut out, creating counterparty risk premiums in stressed periods.
• Central bank operations. Liquidity injections and withdrawals through open market operations (OMOs) are designed to keep the rate near the policy target.

Most modern central banks set a policy rate and then try to steer an overnight market rate towards it. They do this with a corridor: a lending facility at the top, where banks can always borrow against collateral, and a deposit facility at the bottom, where banks can always park surplus funds. In Pakistan these are the State Bank's overnight reverse repo (ceiling) and repo facility (floor). An overnight rate should rarely move outside this band, because no bank would borrow above the ceiling or lend below the floor.

When the call rate sits close to the policy rate, the signal is passing through to the market, and from there into KIBOR, deposit rates and loan rates. A call rate stuck near the ceiling points to a liquidity shortage; one near the floor suggests too much cash in the system. In the 2008 crisis, rates on unsecured overnight loans in many markets jumped above policy rates as banks stopped trusting one another, one reason regulators later moved benchmarks towards secured rates such as SOFR and away from LIBOR.

The State Bank of Pakistan (SBP) publishes interbank call money rates, including an overnight average series, as part of its money market statistics. Its stated aim under the interest rate corridor is to keep the overnight money market rate close to the SBP policy rate, which since 2015 has been defined as a target for the overnight repo rate. In practice much of Pakistan's overnight interbank activity is collateralised repo against Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs), with clean (unsecured) call lending a smaller segment. Historical data show the overnight call average peaking around 20% in October 2008, during a severe liquidity squeeze, and falling to around 5.5% in mid-2016, when the policy rate was low.

Unsecured call markets have shrunk in many countries since 2008, as banks prefer secured repo and hold larger reserve balances. A thin market can produce a rate that is noisy or easy to move with a few trades. India's central bank has kept the weighted average call rate as its target but tracks secured rates alongside it; other central banks now target secured overnight rates directly. The call money rate is still widely reported, but it is best read together with repo rates and interest rates on Treasury Bills (TBs) rather than on its own.

• Reserve Bank of India
• State Bank of Pakistan